Under the Income Tax Act, one can categorize income earned under five significant heads. Hence, the proper classification of income is essential owing to the various methods of calculation. Among these types of income, one can be termed Speculative Income.
What is Speculative Income?
Table of Contents
We can categorize the income earned by taxpayers under five primary columns such as income earned from salary, income earned from property, income earned from business, income earned from capital gain, and income earned from sources, excluding the ones mentioned.
It is necessary to correctly categorize income earned, following the various methods of computation of taxes, incentives, and deductions.
Through the thorough calculation of the income, one can put them under the categories of income earned from business, salary, property, capital gains, or other sources.
According to the Income Tax Act, Speculative income is the kind of income that results from a said ‘Speculative Transaction.’
Understanding Speculative Transaction
If someone could define the phrase ‘Speculative Transaction,’ it would be interpreted as a type of transaction where the said contract includes the records of sale or purchase of certain assets such as shares, stocks, or commodities over a fixed period.
For example, in the case of the shares of intra-day trading, it can be considered the simplest example of a Speculative Income source since there is no such delivery or exit from the trading profile. The entrance and exit of sales can be traced as the same day and are not entered in the Demat Account.
The term ‘intra-day trade’ refers to the process of trading that takes place within one day or 24 hours. Owing to the scenario where no delivery is seen to take place, it can be categorized under the head of ‘Speculative Transaction.’
Considerable Exceptions
The points stated below are certain transactions that have been expressly prohibited from being manipulated as Speculative transactions under the Act.
A hedging agreement concerning merchandise or raw materials. It is an agreement an individual enters during the production or marketing of their business, concerning raw materials or commodities, to restrict loss.
Such said loss may occur due to anticipated pricing inconstancies about their arrangements for the actual delivery of manufactured goods or the commodities sold by them5.
These arrangements cover business losses concerning raw materials or items through actual delivery.
Hedging agreement concerning shares or stocks
This is an agreement about stocks and shares an individual dealer or investor enters to restrict loss in their stock holdings and allocations through value inconstancies.
Forward contract
This is an agreement for an individual who is a member of a particular forward market or stock exchange during any transaction such as jobbing or arbitrage to restrict loss that may appear in the regular course of their business.
A forward market is a type of marketplace that installs the price of a financial tool or asset for scheduled delivery.
Dealing in derivatives
A transaction that is conducted electronically on screen-based operations through a verified broker according to relevant laws and supported by a time-marked contract.
It symbolizes unique client identity and PAN number concerning trading in derivatives as referred to in the Securities Contracts Act of 1956.
Dealing in commodity derivatives
A transaction that is conducted electronically on screen-based operations through a verified broker according to relevant laws and supported by a time-marked contract.
It symbolizes unique client identity and PAN number concerning the trades in commodity derivatives born out in an acknowledged association that is liable to commodities transaction tax as mentioned under Chapter VII of the Finance Act of 2013.
Speculative Business Loss
Suppose a taxpayer is conducting many businesses simultaneously, besides a speculative trade. In that case, such speculative business of the said taxpayer is necessary to be deemed as discrete and separate from any other firms conducted by the same taxpayer.
Treatment of loss from speculative business
- Processing speculative businesses as discrete and separate firms are essential for activating the loss provisions.
- According to Section 73 of the Act, losses arising from speculation business can be activated only against the gains from speculative trade, unlike losses from any other firm, which an individual can initiate against the profits of any such interaction.
- Moreover, one can activate the loss from a specific speculation business advanced into the following year only against the gains of any speculative trade in the next year.
- Besides managing a speculative business as a separate business, an individual should also handle the profits and losses emanating from speculative transactions as distinct from other profits and professional gains.
- Loss resulting from speculative business cannot be born out for more than four assessment years from the successive year in which loss is incited.
- Moreover, if reduction and capital investment on scientific research incurred in speculative business are being led forward, such depreciation or capital expenditure should be activated first.
Loss under Section 73 of the Act
- The individual should not activate the loss as estimated regarding the said speculation business as led by the individual except against the profits of another speculation business.
- Suppose the loss calculated regarding speculation business has not been totally set off for any assessment year, where the assessee had zero income from the other speculative business. In that case, they are subject to additional stipulations and thereby led forward to the next assessment year:
- If any, it shall be put against the profits by the speculation business led for that particular assessment year.
- If the assessee cannot activate the loss entirely, the firm should lead the loss forward to the next assessment year.
- Regarding allowance on the calculation of reduction and capital investment made for scientific research (as per subsection 2 of 73), the provisions employed to speculation business are made in such other firms.
- No loss is to be carried forward past four assessment years from the year in which the business incurred the loss.
- One must consider that a section of the business containing the purchase and sale of shares of any other firm should be assumed to lead a speculation business to the extent to which the company consists of purchasing and selling such assets.
What is Eligible Transaction?
‘Eligible Transaction’ is defined below:
- A transaction executed electronically through a stockbroker or sub-broker or any agents registered under Section 12 of the Act. Those who have followed the requirements of the following rule and regulations issued under the Acts by a bank or mutual fund on any of the acknowledged stock exchanges:
- Securities Act of 1956
- Securities and Exchange Board of India Act, of 1992
- Depositories Act of 1996
- A transaction approved by a time-stamped contract issued by a stockbroker or sub-broker/other agents to every client indicates the unique client identity number and PAN as granted.
Understanding Eligible Transaction for Commodity Derivatives
‘Eligible Transaction’ for commodity derivatives is defined below:
- A transaction executed electronically through a member or an intermediary registered according to the rules and regulations of the acknowledged organizations for dealing in products derivative as per the provisions, bye-laws, and directions issued under the Forward Contract Act of 1952.
- A transaction approved by a time-stamped agreement issued by any member or intermediary to clients indicating the unique client identity number as allotted under the Act rules, directions, unique trade number, the bye-laws as mentioned in the sub-clause(A), and permanent account number authorized under the Act.
Important Points
- Turnover for Speculative business: The sum of positive and negative anomalies is called turnover.
- Speculative loss: A business where purchases and sales of assets are made and delivery is unaffected is called a speculative transaction. A loss in this transaction is a speculative loss.
- Taxes Speculative Income: Intra-day trading where the speculation gains occur regularly is a speculation business transaction.
- Non-Speculative business: A transaction of purchase or sale of commodities settled differently than delivery, transfer, or scrip is a speculative transaction. Any other business is a non-speculative business.
- Speculative trade – Trading an asset with a high-risk rate and expecting more returns to make more profit is a Speculative Trade.
At what point is Audit Mandatory?
An audit is necessary if an individual has a business income and if the business turnover rate is more than Rs 1 crore. The audit is also a requirement according to section 44AD in the cases where the turnover rate is less than Rs. 2 Crores but the business profits are lower than 8% of the turnover rate, and the total income is exceeding the minimum exemption limit.
Hence, the applicability of tax audit in the case of F&O Trading complies with the following:
- In the case of profit gained from transactions of F&O Trading:
- In profit gained from derivative transactions, the tax audit is applicable if the turnover rate exceeds Rs. 1 crore.
- Tax audit under Section 44AB is also applicable if the net profit from any such transactions is lower than 8% of the turnover rate from such transactions.
In the case of Loss from F&O Trading:
- In the case of loss from derivative trading, since profit is lower than 8% of the turnover rate, the Tax Audit is applicable under Section 44AB of the Act.
Tax Handling of Derivative
If any individual is trading in the stock market regularly (mainly non-delivery trade), the returns obtained from it can be categorized as follows:
- Speculative Business Income: Individuals can categorize profits earned from intra-day trading under speculative business income. Tax treatment is similar to business income tax. Individuals can tax as per the tax slab their business falls under and offset the losses only against speculative gains.
- Non-speculative Business income: An individual can categorize income earned from trading advantages on recognized exchanges (like equity, currency, and commodity) under non-speculative business income.
Taxes levied on share trading in these cases are similar to the business income tax. According to the tax group they fall in, a person can tax the profits earned on F&O trading, whereas they can put off the losses on such F&O trading against business profit.
Loss regarding Non-Speculative Business Income:
- One can apply the loss regarding such a business against any other source of income.
Loss regarding Speculative Business Income:
- Individuals cannot set off loss regarding speculative business against any other sources of income. One can apply it only against additional speculative revenues in the same year. If not used, they should carry such losses forward.
Why can’t Singular Transactions constitute Speculative Business?
According to Section 28, it is clear that speculation business should be separate and discrete, while Section 43(5) describes the term speculative transaction.
Through, one cannot apply the provisions unless the loss concerns speculative business. In almost every segment, there is a reference to ‘speculative transactions’ that indicates that if the speculative business should progress within the extent of the given explanation, a particular transaction is inadequate unless there is an organized activity course.
Hence, a single transaction made instead of actual delivery is not sufficient as per section 28 of the Act.
F&O in Share and Commodities
F&O or Futures and Options in the subject of shares or commodities is not considered a speculative business if it is a qualified transaction, as mentioned in the sections of the Income Tax Act and executed in a recognized Stock exchange or a renowned association.
Maintaining Books of Accounts
All the transactions implemented must be recorded, such as buying and selling, electricity and phone bills expense, Demat charges, etc.
If a trader is involved in various trades such as intra-day, F&O Trading, investing in MFs, one should disclose the business income earned from each clearly since the tax treatment is different for each type of trade.
We can categorize the everyday expenses depending on the amount of time spent on these various types of businesses by taxpayers.
Renowned Stock Exchanges in India
The renowned Stock Exchange Limited and the United Stock Exchange of India Limited are a part of MCX, which is the abbreviation of Multi Commodity Exchange. They are some of the most famous stock exchange associations located within the Indian subcontinent. NSE or National Stock Exchange and BSE or Bombay Stock Exchange are the most well-known Stock Exchanges in India.
FAQS
How can we calculate turnover for a ‘speculative business’?
Ans: In the case of speculation business, the aggregate of both positive and negative differences in the business’s turnover.
What is meant by the term ‘speculative loss’?
Ans: At a business transaction where delivery of assets is not affected, it is a ‘speculative transaction.’ The loss arising from a speculative business transaction is a ‘speculative loss.’
How does one tax speculative incomes?
Ans: According to Section 43(5) under the Income Tax Act of 1961, we can consider an intra-day trade as speculative, and the income earned from it would be either speculative loss or profit. Tax levied on income from such speculation is done at regular rates like other businesses.
How does one define a non-speculative business?
Ans: Purchasing or selling assets, including stocks and shares resolved differently from actual delivery or transfer of the item, is termed a speculative transaction. The business that consists of speculative transactions is called a speculative business. A business other than a speculative business is named a non-speculative business.
What does speculative trading mean?
Ans: Speculation is the name given to trading in an asset or handling a financial transaction with a risk of loss. The goal is to take the highest advantage of rate inconstancies in the market.
Can we consider Dabba Trading a speculative transaction?
Ans: Dabba trading, where the broker assists the taxpayer in dealing outside the stock exchanges is considered a speculative transaction.
What are some exceptions considered in the subject of speculative income?
Ans: Certain transactions may appear speculative but have explicitly been excluded from the interpretation of speculative transactions. Hedging contracts regarding raw materials or commodities, hedging contracts concerning forward contracts, stocks, and shares, and dealing in and commodity derivatives.
Conclusion
Understandably, under the Income Tax Act, 1961, speculative income is a complex deal and, at times, can be pretty risky. The taxpayers have to administer several transactions and their actual reliability as a speculative business.
It is crucial to conclude whether a speculative transaction can obtain good profits within the asserted rights. Sometimes, several transactions are misrepresented or misunderstood as speculative transactions depending on the non-delivery of shares and commodities and based on the business’s purpose.
One should be meticulous with all the clauses to conclude which transaction is speculative and file the tax and other approved purposes accordingly.
